Jittery market belies good economic news

War, terror, oil prices are among the issues preoccupying investors

Corporate profits are roaring, more people are going back to work and the economy is humming.

So why do investors have the jitters?

Plenty of reasons, but none very good, experts say.

"This is one of the worst worrywart markets that I have been in in a long time," said William F. Dwyer, president and chief investment officer at MTB Investment Advisors in Baltimore. "The comfort level of the average investor has been pretty well shook up."

Investors simply have too much on their minds: a prolonged war with Iraq, rising oil prices, terrorism, the election, rising inflation and what an increase in interest rates might do to the economy.

When major negative events occur, they have been sellers. The March 11 train bombings in Madrid, Spain, sent the Dow plunging 168.51 points. Word of the Iraqi prisoner abuse scandal pushed it down another 135.56 points. Even good news has shaken investors, as when the Labor Department reported that the economy added 288,000 jobs in April. That caused the Dow to drop 123.92 points amid worries that the Federal Reserve would raise interest rates.

"The headlines are so awful," said Philip S. Dow, director of equity strategy at RBC Dain Rauscher in Minneapolis. "I think that at least in the short-term, they kind of override the important fundamental benchmark that the economy is better and earnings are better."

The indexes display investors' angst.

Since the beginning of March, the Dow has fallen 5.8 percent to 9,966.74. The Standard & Poor's 500 stock index is down 4.5 percent to 1,093.56, and the Nasdaq composite index is down 5.8 percent to 1,912.09.

Experts believe they know a cure for investors' case of the nerves.

The war in Iraq, they say, must not escalate, and the flood of bad news coming from the Middle East has to slow.

"I think it is wearing on investors day to day, to the point it is getting heavier and heavier," Dwyer said. "I think people are now starting to feel ... the Vietnam scenario, that we are getting in deeper, that we don't have control, that this is just going to drag on. That creates a great deal of uncertainty and higher risk factor in the marketplace."

Investors also need to see stable energy prices, namely in oil. Gas prices have hit record levels, and in some regions of the country a gallon sells for more than $3. By summer, it could be higher.

Dow, the Dain Rauscher strategist, expects oil, which has soared past $41 a barrel, to fall within months.

"Any kind of a downtick in oil prices over time, maybe this summer, would help," Dow said. "Our feeling is that oil prices are likely to average around close to the high $20s next year, so we think that oil prices will come down at some point."

Another cure, some experts say, is for the Federal Reserve to get on with raising the federal funds rate, which is at a historic low of 1 percent.

More economists believe that the Fed could raise it as early as next month. An increase would show investors that the economy can function smoothly with higher rates, experts say.

"I'd love to see them do a surprise hike," Dow said. "My sense is that would clear the air somewhat. The anticipation of change would be out of the way, and we would be on the track to tightening up a little bit, which we probably need to do."

Investors need to calm down, experts say, because they have little control over the war, oil prices and interest rates. The nation and the stock market have ridden out tougher patches. "You have to be willing to manage fear just as we manage greed when things get out of control on the upside," said Richard D. Steinberg, president of Steinberg Global Asset Management Ltd., a money manager based in Boca Raton, Fla. "We have to look at things that we have control of; we do not have control of the geopolitical scenario."

Steinberg likes the deals he sees and says there are plenty of them. "I am not as negative as everybody is," Steinberg said. "I think the media has gotten way too much on this interest rate and oil story. We are in an oversold situation."

He likes solid companies such as Citigroup, General Electric Co. and Viacom Inc., all of them off their 52-week highs. General Electric trades in the $30 range, about half of what it traded for in late 2000. "As long as they [investors] are not buying toxic waste, they can sit back with a baseball glove and let things come to them," Steinberg said.

Bill D'Alonzo, chief executive and chief investment officer of Greenville, Del.-based Friess Associates, manager of the Brandywine Funds, said that if investors would turn their attention away from the "macro distraction du jour," they would notice many companies "firing on all cylinders."

He said corporate earnings are exceeding expectations, and the trend looks like it will continue as the first-quarter earnings season comes to a close.

Nearly 90 percent of S&P 500 companies that have reported results have seen first-quarter earnings grow 29 percent on average, beating expectations by 8 percent, according to Prudential Financial.

Dain Rauscher strategist Dow said he believes the bull market is alive and well. He expects the Dow Jones and S&P 500 to be up about 10 percent this year.

"I think it is a bull market," he said. "I don't think people give enough respect to the innovative nature and dynamic nature of our economy."

Dwyer, MTB's chief investment officer, said he agrees that the market will continue to rise, and sees the S&P 500 hitting 1,200 by the end of the year.